Interest Rate Surge Puts Downward Pressure on Overall Market

The Russell 2000 index was hit hardest, falling 1.84%, while the tech and semiconductor sectors also entered a general correction phase. Among the 11 sectors, only the energy sector saw gains.

The Iranian president's hawkish remarks fueled the oil price surge, as difficulties in negotiations with Iran are anticipated.

S&P Global Manufacturing PMI recorded 57, significantly exceeding the forecast of 53.6, while the Services PMI also came in high at 58.7 against a forecast of 55.8.

These strong economic indicators reinforced the view of a booming economy, reducing expectations for Federal Reserve (Fed) rate cuts.

Consequently, Fed governors continued to make hawkish remarks, and the probability of a November rate hike rose from 55% to 73%.

Indirect demand from foreign central banks was sluggish, forcing primary dealers to take on large volumes, which caused the 5-year yield to jump 15 basis points during the session. This could lead to a decline in bond prices and the value of mortgage-backed securities (MBS).

The US delegation was also seen walking out during the Iranian president's speech.

Michael Burry's short positions targeting Micron, Nvidia, SOXX, and Palantir coincided with the Nasdaq 100 index reaching new highs. He views the memory shortage as part of a temporary economic cycle, hinting at a potential sharp decline in tech stocks.

He placed short bets on stocks like Micron, Nvidia, SOXX, and Palantir, stating his plan to cut losses if new highs are breached and hold put options.

According to Taiwanese media reports and ASO reports, China's memory chip production capacity is steadily increasing, raising concerns about oversupply.

However, some analyses suggest that strong domestic demand in China may lead to a continued global supply shortage for some time.

Some foresee that China's overproduction could lead to long-term dumping and trade friction for more than three years.

The percentage of stocks above their 200-day moving average sharply declined from 77% to 56%, indicating that fewer stocks are driving the market's upward trend.

While the equal-weighted S&P index fell 4%, the structure where a few tech stocks lead the market is deepening.

This suggests a weakening of overall market health, and it is projected that without a decline in interest rates, market gains will struggle to broaden.

Specifically, a decrease in oil prices is considered a crucial factor for market stabilization.

Positive signals in the oil supply chain, such as the reopening of Saudi pipelines, and the anticipated Republican control of the House, support market confidence. HSBC strategists recommend significantly increasing exposure to US and Asian tech stocks and European bank stocks after the midterm elections.

HSBC recommends increasing exposure to US and Asian tech stocks and European bank stocks after the midterm elections, believing that positive news regarding the oil supply chain, like the reopening of Saudi pipelines, and the anticipated Republican control of the House, will boost market confidence.

Investment-grade bonds are expected to remain weak through the mid-term, but equities are widely believed to have significant upside potential after a short-term correction.

While investment-grade bonds may continue to face difficulties in the medium term, the stock market is projected to see an uptrend after a short-term correction.

The gap between 10-year and 2-year Treasury yields rapidly narrowed from 70bp to 21bp, exacerbating the yield curve inversion.

The sharp rise in short-term rates (2-year) increases banks' funding costs, leading to a deterioration in net interest margin (NIM).

A decrease in banks' net interest income can slow down loan supply, which may hinder corporate growth.

If the Fed implements additional rate hikes, the decline in bank stocks is likely to deepen.

CoreWeave secures large tech companies and leading AI research labs as clients, posing relatively low risk, and receives 15-25% of revenue upfront, mitigating net debt burden. However, critics point out that Q3 interest expenses could account for one-third of revenue.

Salesforce recorded its fastest revenue and profit growth in years, yet its stock fell due to a service outage during an AI-related event and concerns about OpenAI's technological innovation.

However, considering its lower price-to-earnings (P/E) ratio compared to the industry average and high earnings per share (EPS) growth rate, it is deemed undervalued. An analysis suggests a widening gap between fundamentals and stock price, indicating significant upside potential.

This implies a 26% upside from Tuesday's closing price.

Amazon's Bedrock service is expected to achieve a 50% return by 2027, but there are also suggestions that Amazon's ecosystem needs a defensive strategy against third-party agent services like Meta's 'Muse.'

Strong generative AI demand is expected to offset inventory management and margin pressures in the retail segment.

Stifel raised Microsoft's price target from $530 to $575, representing approximately 15% upside from Tuesday's closing price.

M365 (Microsoft 365) is expected to sustain mid-to-high teen revenue growth, and while AI infrastructure investments may impact the stock for about another year, operational efficiencies are projected to maintain operating margins. Microsoft possesses the strongest cash flow among big tech companies.

Dell Technologies' stock surged 350% due to AI success, demonstrating the effectiveness of value investment strategies that consider future earnings. Funds with a significant allocation to tech stocks recorded relatively higher returns, leading value investors to actively embrace tech giants like Amazon and Google. Microsoft has secured the strongest cash flow among big tech companies, and investors are now deploying capital based on this, anticipating future growth.

Dell Technologies is presented as an example of AI success, with its stock surging 350% from an 8x P/E, suggesting that value investors should also focus on tech stocks with such growth potential.

An analysis suggests that actively embracing tech stocks like Amazon, Google, and Microsoft is necessary to achieve high returns.

Indeed, value funds with significant tech stock allocations were found to have higher returns than those without.